JPM's Anworth Mortgage Upgrade Completely Unfounded

Friday afternoon I decided to go short a small position in Anworth Mortgage Asset Company (ANH) at $6.43. The stock had been strong the past two days due to an upgrade by JMP Securities, but to be honest, it was one of the stupidest upgrades I’ve ever seen. ANH was upgraded after they managed to sell almost a billion dollars worth of Agency and non-Agency MBS at a small loss. While I’m all for reducing leverage, it is obvious that from the news that the company can’t obtain financing in the commercial paper market.

In addition, the key here is that the company had to sell both Agency and non-Agency MBS. This indicates to me that the company could not get rid of a significant portion of their non-Agency MBS (which are still significantly impaired), and therefore they had to sell agency bonds to raise cash. My point is that the company’s portfolio was only 70% agency MBS before the sale, so they still held almost $2 billion in non-Agency MBS. Nobody knows how much non-agency MBS the company was able to sell, so they still may have a huge amount of impaired MBS on the balance sheet. With liquidity once again being withdrawn from the market, the company is going to have a lot of problems with further financing at a decent rate, and that will prevent them from capturing the gains from interest rate spreads.

I believe the company’s recent guidance for an interest rate spread of 0.40% for the fourth quarter presumes a return to normalcy that we are not going to see, and therefore, spreads will be smaller and the company will be stretched thin as far as making money. Throw in a bit of deterioration of credit quality on the company’s non-Agency MBS, and things could get really ugly here.